A Two-Country NATREX Model for the Euro/Dollar

35 Pages Posted: 29 Apr 2008

See all articles by Marianna Belloc

Marianna Belloc

Sapienza University of Rome - Department of Economics

Daniela Federici

University of Cassino and Southern Lazio

Date Written: April 2008

Abstract

This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States, which are fully specified and allowed to interact. After description of the theoretical framework grounding on dynamic disequilibrium modelling approach in continuous time, we implement empirical analysis. First, we estimate the model in its structural form as a simultaneous nonlinear differential equation system for the 1975-2003 period. Second, we simulate the Euro/USD NATREX series in- and out-of-sample by using parameters estimates. The simulated equilibrium real exchange rate enables us to determine a benchmark against which the dynamics of the actual real exchange rate can be measured.

Keywords: NATREX, equilibrium exchange rate, Euro/USD, structural approach, continuous time econometrics, misalignment

JEL Classification: F31, F36, F47

Suggested Citation

Belloc, Marianna and Federici, Daniela, A Two-Country NATREX Model for the Euro/Dollar (April 2008). CESifo Working Paper Series No. 2290, Available at SSRN: https://ssrn.com/abstract=1126634

Marianna Belloc (Contact Author)

Sapienza University of Rome - Department of Economics ( email )

Via del Castro Laurenziano 9
Rome, 00161
Italy

Daniela Federici

University of Cassino and Southern Lazio ( email )

Via S. Angelo
Cassino, 03043
Italy

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